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I agree that one way to stop inflation is to limit federal spending and balance the federal budget. I have sponsored House Joint Resolution 177 which ties the concept of balancing the budget by spending restraint to the Consumer Price Index.

Since 1962, the Federal budget has been in deficit 18 times and produced a surplus only once. During the past five years, Congress has defied conventional economic theory and accumulated nearly $223 billion in deficits during a period of robust recovery:

To put the public debt into better perspective, let me point out that America's public debt didn't top one billion dollars until 1864, just following the Civil War. In fact at the present rate of growth of deficit spending, Congress is adding more to the public debt every two weeks than the total public debt in 1900.

In the past 18 years, the inflation rate has soared from 1.2 percent to a predicted 12 percent annual rate this year. However, the so-called economic experts continue to raise their predictions in the face of an inflation rate of 13 percent over the past six months. Since 1962, the public debt has increased from $303 billion to the current rate of $826 billion for 1980.

There is little question that the growth of Federal spending in red-ink is an important factor in the raging inflation. Last year total government expenditures at the Federal, state and local levels amounted to 36 percent of the dollar value of this country's entire production of goods and services, in contrast to 30 percent in 1960, 20 percent in 1940 and only about 10 percent in 1929.

While the Congressional Budget Act of 1974 has forced the Congress to establish so-called ceilings on expenditures and revenues, it has failed, thus far, to end the congressional habit of deficit financing. We recently enacted a Second Concurrent Budget Resolution which embraces a deficit in fiscal 1980 of $28.9 billion just one year before our commitment to a balanced federal budget.

At the same time, the Rules of the House were conveniently changed by the Majority September 27 to ensure that Congress never need to vote again to raise the debt ceiling, which now sits at $879 billion.

The persistent deficits and borrowing needs of the government compete with the private sector in the financial market. Funds which could be used to finance capital investments are diverted in support of the deficit. The result has been a variety of e onomic problems including an absence of private investment and a subsequent decline in productivity.

It is time for Congress to recognize the relationship between inflation, which is eating away at all Americans' standard of living and the apparent refusal of Washington to face up to the consequences of federal spending.

It is worth noting that there are over 200 sponsors and co-sponsors of some 65 balanced budget resolutions pending before the House Judiciary Committee. There are 55 similar bills in the Senate with equally strong sponsorship.

I believe that a compromise is in order between the two approaches of mandating a balanced budget and utilizing spending restraints to achieve a balanced budget.

I would urge that the following considerations be reviewed by the Subcommittee: 1. Any constitutional amendment should be simply drawn. 2. It should require that the budget be balanced on an annual basis.

3. There should be flexibility which would enable the Congress to deal realistically with any carefully-defined national emergency by a two-thirds vote in each House.

4. The proposal might be linked either to the growth rate in the nominal Gross National Product or the Consumer Price Index during the previous calendar year.

5. The amendment should require that any surplus be used to reduce the public debt.

Thank you for the opportunity to present my views on this vitally important

ingue.

Senator Bayh. That concludes our hearing for today.

(Whereupon, at 12:35 p.m., the subcommittee recessed, to reconvene subject to call of the Chair.]

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U.S. SENATE,
SUBCOMMITTEE ON THE CONSTITUTION
OF THE COMMITTEE ON THE JUDICIARY,

Washington, D.C. The subcommittee met at 9:45 a.m., pursuant to call, in room 6226, Dirksen Senate Office Building, Hon. Birch Bayh (chairman of the subcommittee) presiding.

Present: Senators Bayh and Hatch.

Staff present: Subcommittee on the Constitution; Kevin 0. Faley, chief counsel and executive director, Mary K. Jolly, staff director and counsel; Linda Rogers-Kingsbury, chief clerk and deputy staff director; Christie F. Johnson, assistant clerk.

Minority staff: Tom Perry, minority chief counsel; Steve Markman, minority counsel; Dennis Shedd, counsel to Senator Thurmond; and Chip Wood, counsel to Senator Simpson.

Senator Bayh. We will reconvene our sixth day of budget hearings.

Our first witness this morning is our distinguished colleague, Roger Jepsen.

Senator Jepsen, it is good to have you with us this morning.

TESTIMONY OF HON. ROGER W. JEPSEN, A U.S. SENATOR FROM THE

STATE OF IOWA

Senator JEPSEN. Thank you, Mr. Chairman, Senator Bayh. If I am jumping around here a little bit this morning, I hope our witnesses will bear with us.

Glad to have you with us and anxious to hear what you have to say.

Senator JEPSEN. I know, as Chairman of the Intelligence Committee, there are a lot of things happening around the world that maybe suggest you have two or three meetings a day and I can understand.

Mr. Chairman, I am very pleased to be able to appear before your committee today to present my views on a matter of great importance, a constitutional amendment to provide for a balanced Federal budget.

I will not speak in favor of any particular amendment, since I understand that the subcommittee will shortly be drafting its own proposal. Therefore, I will confine my remarks to general comments about why I think a balanced-budget amendment is desirable and the essential features which any such amendment should contain if it is to accomplish its purpose.

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In my view, the demand for a balanced-budget amendment is basically the expression of a belief that Government should be required to live by the same rules that individuals must live by. An individual cannot spend his way to prosperity, nor can he spend more than he takes in year after year without ultimate bankruptcy.

Since the 1930's, however, Government has maintained that it need not live by such rules. Government deficits, far from being seen as destructive, leading to bankruptcy, have been viewed as indispensable to economic stability and prosperity. This may have seemed plausible once, but today appears naive and dangerous.

I can understand how policymakers of the 1930's may have been forced into adopting large-scale deficit spending as a means to help ease the effects of the Great Depression. What concerns me is that deficit spending became institutionalized long after it had any practical justification.

I owe this to the influence of John Maynard Keynes, who gare theoretical and economic justification to continuing deficits. The importance of Keynesian thinking, in this respect, has been examined at length by Profs. James Buchanan and Richard Wagner in their book, "Democracy in Deficit: The Political Legacy of Lord Keynes," which I commend to anyone interested in this subject.

Perhaps we could have lived with modest deficits almost indefinitely, Unfortunately, the small, occasional deficits of the 1950's and early 1960's grew into the massive, continuous deficits of the late 1960's, and 1970's.

What happened, I think, is that the economy began to get used to deficit spending and refused to react to deficits the same way it had previously, when they were intermittent and unexpected. Thus it became necessary to have larger and larger deficits year after year for them to have the desired effect on output and unemployment.

This fits in with what economists call a “rational expectations" view of the economy. According to rational expectations, deficits can only increase output and employment if they are unexpected. Thus, Government is required to continually attempt to fool people. This is ? a very unsound way to govern our Nation's economic affairs.

The result is that today, our economy is so conditioned to deficits and inflation that radical surgery, with its accompanying pain and suffering, appears necessary to stop inflation. I would compare the situation to an alcoholic who must suffer from severe withdrawal pains in order to rid himself of the dependence on alcohol. The pain may be great, but it is necessary.

I am convinced, however, that our economy's withdrawal pains from elimination of inflationary stimulus can be greatly reduced by passage of a balanced-budget amendment. By approving such an amendment, the Congress will be sending a clear, unmistakable message to the American people and the world that we are serious about fighting inflation.

As soon as people become convinced that inflation is not going to go on forever, they will quickly readjust their affairs accordingly and the pain caused by readjustment from an inflationary economy to a noninflationary economy will be greatly reduced.

Let me give you an example of what I mean. Interest rates are today very high, somewhere around 15 percent and climbing. The main reason

why these rates are so high is that an inflation premium has been tacked onto the interest rate which would otherwise prevail in the absence of inflation.

Thus, if one were willing to lend money for 5 percent interest in the absence of inflation and inflation were expected to be 10 percent during the time of the loan, one would expect to receive 15 percent interest in order to break even.

In other words, inflationary expectations are a key factor in explaining high interest rates. Conversely, even if inflation were high at the moment the loan were made but inflation was expected to be much lower in the near future, interest rates would drop because inflationary expectations would be lower.

I think that expectations are just as important in other economic affairs as they are with interest rates, and that if people come to believe that inflation would indeed stop, they would react accordingly. Labor unions would not demand such high wage increases in order to try and stay ahead of inflation, prices on futures markets would decline, and there would be an immediate increase in business investment and savings.

The important thing, as I said, is that we, in Congress, make the commitment to stop inflation and communicate this commitment to the American people in a forceful way. Passage of a balanced-budget amendment could serve this purpose.

Of course, mere passage of a balanced-budget amendment would not in and of itself stop inflation. Budget deficits do not automatically

translate into inflation. However, they are a major factor in setting *** up inflationary pressures.

What usually happens is that Government deficits require increased Government borrowing on financial markets, leading to *** "crowding out and higher interest rates, which in turn leads the to Federal Reserve Board to attempt to bring interest rates down again

by increasing the quantity of money. When the quantity of money increases faster than real economic growth, the result is inflation.

Now, as I said, this can have some stimulative effect on the economy at first, when it is unexpected. But eventually people begin to associate budget deficits and increases in the money supply with inflation and they react immediately, by increasing prices and wage rates. This is why it is futile for the Government to attempt to fight unemployment or increase real economic growth through conventional Keynesian policies. The result will only be higher inflation, higher unemployment, and slower economic growth.

Some people argue that a balanced-budget amendment is unnecessary because the budget is, in fact, moving toward balance. Well, there are two problems with this. First is that it is not good enough to balance the budget in 1 year. The American people are looking for a permanent commitment to keep the budget balanced and inflationary expectations are not going to be affected unless they believe that such a commitment is made.

If we were to balance the budget 2 or 3 years in a row without an amendment, they might begin to believe we were serious, but the American people would probably continue to be suspicious of our commitment to budget balance.

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